Securities market participants regularly place high volumes of offers or orders to buy or sell securities within thousandths (milliseconds) or even millionths (microseconds) of a second. Orders may be designated by the offering account as visible—published to other market participants on public trading venues—or hidden—concealed from other market participants, either within public trading venues or in private “dark pools” until a matching counterparty appears and the order is executed. The vast majority of all orders—visible and hidden—are rapidly cancelled by the offering account without being executed.
During the time that visible orders are open—even if only for milliseconds or microseconds—they can impact market prices. Ordinarily, the impact of visible orders on market prices is the natural result of basic microeconomic principles. The publication of a single offer to buy a security exerts some upward pressure—perhaps negligible—on the price of the security, and vice versa. This phenomenon is expected and legitimate.
However, regulators in the United States and abroad have recently documented instances of market participants unlawfully manipulating market prices by placing and subsequently cancelling multiple orders on one side of the market with the intent of creating the appearance of bona fide supply or demand, thereby pushing market prices to levels at which the participant can obtain opposite-side executions at more favorable prices than would have otherwise been possible. This practice has been variously labeled by regulators as “layering” or “spoofing.”
Regulators have required market participants who are responsible for either originating orders or transmitting orders to trading venues to monitor the orders they originate or transmit to detect and prevent manipulative order patterns, including but not limited to layering and spoofing. Many of the accounts subject to these requirements routinely generate or transmit high volumes of orders to trading venues each second, which makes it difficult to monitor. Existing systems have been deficient in appropriately meeting these and other technical problems.
Therefore, there is a need for a system and method that provides an automated monitoring of local order data to detect potentially manipulative order patterns and to assist compliance professionals to analyze and determine whether remedial actions are required with respect to such patterns to comply with governing regulations.